Why the NFP matters and why investors are fretting now that we are in September
This week has seen moderate increases for stock markets. The end of the summer holidays are fast approaching, but markets are still sleepy as they contemplate an NFP report on Friday, next week’s ECB meeting and a torrent of economic data that, so far, suggests that the major global economies are just about managing to stay on track despite a rapid increase in Covid infections. The S&P 500 is up some 60 points this week, which is nothing much to write home about, however, it could push the US index to another fresh record high. Elsewhere, the Nasdaq is edging higher as we move towards the all-important US payrolls report on Friday even though it has been fairly flat on the day as traders prefer to play the reflation trade.
Growth fears: are they overdone?
On the topic of the reflation trade, this week it has shown more signs of life, for example on Thursday Boeing was up more than 2.2%, on the back of news that the US aviation giant is joining the space race and has invested in Virgin Orbit, and Malaysia lifted the ban on the Boeing 737 Max jet, after grounding this aircraft for two years after crashes involving Boeing planes in recent years. This doesn’t change the general tone in markets since earlier in the summer that suggests markets are pricing for a downgrade to global growth prospects in the US, Europe and to a greater extent China. This is partly to be expected as the boost to the global economy from the reopening after months of Covid lockdowns earlier this year is set to fade, while at the same time supply chain bottlenecks take longer to ameliorate and thus keep inflation high in the system. This has led to a move towards defensive sectors in recent months, which includes some of the bigger names in the tech sector. Facebook and Alphabet have seen their share prices rise sharply in recent weeks, while Apple shares jumped earlier this week, as its share price is once again in record high territory. Thus, as we move towards the payrolls report on Friday the market is finely balanced between coveting defensive stocks and the big names in the tech sector, at the same time as dipping their toes back into the reflation trade in case we get another whopper of an NFP number.
When Treasury yields and the dollar drift apart
The positive mood in stock markets has even allowed the beleaguered video meeting service Zoom to stabilise after sharp losses earlier this week. It is also weighing on Treasury yields, with the yield on 10-year Treasuries pushing higher (yields move inversely to price), and it is now at 1.31%, compared with 1.25% ahead of last week’s Jackson Hole symposium. The FX space is trading flat, with limited gains for the euro and GBP. EUR/USD is at its highest level since the start of August and is trading above $1.1860. There could be further gains in store for this pair, however, beware volatility if we get a strong payrolls number. Elsewhere, GBP/USD is also back above $1.38, thus do not expect the dollar to move in line with Treasury yields in the current environment. Strengthening economic data combined with a dovish Federal Reserve can be a toxic mix for the USD, and we prefer to be cautious on USD longs in the medium to long term.
What’s going on with Alibaba and Chinese companies?
Oil is also moving on Thursday, and Brent crude is up some 2.5% after Opec went ahead with its planned supply hike. Rather than weigh on the price of crude this is seen as a positive sign since it suggests that underlying demand is rising. We would also like to point out that Alibaba’s share price had started to increase earlier this week, although its share price ended up falling slightly on Thursday, after the world’s largest online and mobile commerce company pledged to spend billions on the Chinese Premier’s “common prosperity” vision in an effort to acquiesce Chinese regulators who have clamped down on internet companies that it sees are at odds with its own economic philosophy. While this could take some of the pressure off of Alibaba and others that have suffered from Beijing’s economic crackdown in recent months, it is also a worrying sign for investors: mega companies paying for the implementation of government policy is not something that goes down well with Western investors, thus we could see Chinese companies continue to come under scrutiny and we do not think that this is a turning point for Chinese shares.
NFPs: what to expect
Before we sign off, we would like to remind you that US Payrolls are expected at 750k for August, which is lower than the 900k+ readings of the last two months. Average hourly earnings are expected to rise 0.3%. We think that a reading in line with expectations could be neutral for the USD, however a stronger than expected average monthly earnings figure for August could see the dollar rise and EUR/USD and GBP/USD both turn sharply lower in the short term.